Masterworks on Loan – Love of Art or Sales Tax Savings?

Museums are often able to keep their collections diverse because of the wealthy art collectors that are willing to loan their pieces to them. On the surface, this seems like a very honorable act, but what many don’t know is there is a hefty tax incentive for these collectors. There is an increasing amount of art collectors that are employing this sales and use tax savings tactic when purchasing expensive art. As brought to the forefront in a recent NY Times article, they are using clever legal planning to get around paying a substantial sales (or use) tax bill on a multi-million dollar piece of art.

In the state and local tax (“SALT”) community, many art collectors are taking advantage of the so-called “Norton Simon rule” to avoid sales and use tax on art purchases. From a historical perspective, Norton Simon was a wealthy industrialist and art connoisseur whom used this tax break system and had lent his art to several museums. Typically, the way the scenario works is the art connoisseur offers their artwork to be displayed in a museum in one of the states that do not have a sales or use tax (New Hampshire, Oregon, Alaska, Montana, or Delaware). Most states with a sales and use tax regime also have a presumption that if art is first shipped to another state and remains there for a period of time (usually greater than 6 months) then its first use is in that state and no tax is due when they bring it back to their home state. Therefore, if the art is displayed in a tax-free state and then brought into a taxable state after the applicable period, then no sales or use tax is due.
For example, Ms. Wynn, the former wife of Steve Wynn, casino tycoon, purchased the Bacon triptych and has reportedly loaned the piece to a museum in Portland. Upon purchase, she shipped the painting to Oregon instead of her Las Vegas home. Conveniently, Oregon, as stated above, does not have a sales and use tax. By leaving the art on display in Oregon, Ms. Wynn saved some $11 million dollars in sales and use tax.

Many commentators believe this tactic is unfair. However, supporters of this rule argue that it promotes collectors, whom may otherwise choose to keep the works in their private collections, to give the general public an opportunity to experience their beauty. Many educators of the arts also promote this tactic because they incorporate these works into their teaching programs which gives students something to look forward to. On the other hand, there are several critics of the practice that question whether the loans to certain museums will disrupt the museums typical style of art they choose to display. Others state that although it opens doors for small cities to draw people to their museums, are the benefits really worth giving these collectors (whom are typically very well off) a tax break they don’t necessarily need along with take money away from the states. One can probably guess what side of the fence I fall on. This strategy is still not known to many collectors. Typically, only the collectors whom involve attorneys in their art interests are aware of this rule. Otherwise, only a dealer or art specialist would know about it, and may only inform the collector about it if they promote the practice. Unfortunately for states, they have no trustworthy way of calculating how much tax revenue is being lost. Just to put it in perspective, one collector located in California has saved $390,000 in sales and use taxes by loaning his art to a museum and qualifying for the first use exemption tax code. In California, this rule is not only for art, the rule specifically states that if the object is first put to use outside of the state for anytime longer than 90 days the owner of the object does not owe tax on it.

Therefore, next time you are purchasing your million dollar painting, remember to call your SALT attorney.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390..